It's been great to guest blog at Credit Slips for the past week. Thanks to Bob Lawless for being such a welcoming host and guiding me through the technical details. And to Debb Thorne for her warm introductory note.
I especially appreciate establishing a dialogue between legal experts and sociologists. In fact, sociologists who specialize in economic processes have recently been paying greater attention to issues of credit and debt. More specifically, they have examined how the creation, maintenance, and transformation of interpersonal relations intersect with a whole range of economic transactions from consumption to debt. Although they have dealt less frequently with debt and bankruptcy, their findings shed light on those tricky transactions as well.
While standard economic approaches focus on individual bargaining and strategizing in carrying out economic transactions, new approaches in the sociology of economic life start their analysis by focusing on interactions, transactions, and social ties. In different ways, sociologists show how regularly people create and rely on close ties for what others think of as strictly economic transactions.
Let me give you a few examples from the sociological and anthropological literature. Paul DiMaggio and Hugh Louch survey pre-existing non-commercial ties between buyers and sellers in consumer transactions involving major purchases: cars, homes, legal services, and home repairs. DiMaggio and Louch find a remarkably high incidence of what they call within-network exchanges. A substantial number of such transactions take place not through impersonal markets but among kin, friends, or acquaintances. Noting that this pattern applies primarily to risky one-shot transactions involving high uncertainty about quality and performance, DiMaggio and Louch conclude that consumers are more likely to rely on such non-commercial ties when they are unsure about the outcome. Risk favors reliance on friends and relatives.
In another study, Mariko Chang compares how households with different economic resources seek information about financial transactions. She finds that overall social networks constitute the most common source of information about saving and investment. Wealthier families, however, are more likely than poorer families to also consult financial professionals and certain kinds of media (e.g. direct-mail advertisements, the Wall Street Journal, or internet financial sites). The less affluent are more likely to rely exclusively on friends and relatives for information on such matters as account fees or interest rates. Among other reasons, Chang speculates that the wealthy are less likely to rely on personal networks because they find them less useful to gain information on savings and investments, they are reluctant to share personal financial information, or they are concerned with building expectations of reciprocal obligations.
As readers of this blog probably know from personal experience, close ties figure even more prominently in house purchases -- the largest expenditure that most households ever make. Nicholas Townsend's interviews of a group of men in their late thirties from varied social backgrounds, provides some specific evidence of how that works. Acquisition of homes, Townsend finds, often involves extraordinary efforts including relying on kin, increasing hours of work, and depending on wives' income. The men acknowledged receiving substantial family help of one kind or another in their first home purchase: help included both direct financial assistance (such as a loan from parents or a gift of a down payment), guarantees such as co-signing a mortgage, and other non-financial support in finding or building the house. It also included living with parents rent-free while saving for a down payment and buying from a relative below market price.
In addition, most men reported that they saw the likelihood of family assistance - especially their own parents' - in case of financial crisis as a crucial form of insurance. As we might expect from yesterday's discussion of the independence myth, Townsend reports that the men downplayed that substantial help in favor of self-portraits representing their own capacities to provide their households with adequate, appropriate shelter.
It is not just households that rely on interpersonal networks. One of the more surprising results from recent work on capitalist firms is how regularly business people develop and use ties with their suppliers, customers, and counterparts in other firms for aid and information in getting their own work done. Brian Uzzi, of instance, has looked at middle-market banking. There he finds that firms whose executives establish friendships (or personal relationships) with officials at credit institutions receive lower interest rates for loans than those that operate at arms-lengths. Across a wide range of commercial transactions, personal ties matter. They not only facilitate connections, but also often produce superior economic outcomes.
Specialists in credit and bankruptcy can surely benefit from this sort of theory and research. Most likely they will find that personal ties matter significantly to how, and how well, firms and households deal with financial crises.